Guide to mortgage protection insurance

Guide to mortgage protection insurance

If you’re worried about how you’ll repay your mortgage if something were to happen to your income, you may consider getting mortgage protection insurance.

Adverse events can often happen without warning and leave you in a lurch. Insurance is meant to give you the peace of mind of a safety net if something bad were to happen. But not all insurance actually does so.

Is mortgage protection insurance something you need, or is it just another junk insurance add-on? Find out here, as well as how much it costs and what it covers.


Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.


What is mortgage protection insurance?

Mortgage protection insurance is designed to cover you in the event you can no longer meet your home loan repayments due to illness or injury, and can help your family make repayments if you die. It can also cover you if you lose employment, but this is typically only if you’re made redundant or fired, not if you resign. Part-time or casual employees and the self-employed, all working less than 20 hours a week, will typically not be able to get cover.

Also known as home loan insurance, borrower’s mortgage insurance, or consumer credit insurance (CCI), borrowers take out mortgage protection insurance policies at the start of their mortgage and pay a premium monthly or annually to receive cover.

Is Lenders Mortgage Insurance the same as mortgage protection insurance?

Mortgage protection insurance is often confused with Lender’s Mortgage Insurance (LMI), but the two are quite different. LMI protects lenders in the event borrowers can no longer make their home loan repayments. Mortgage protection insurance protects borrowers if they can no longer make their home loan repayments.

Unlike insurance policies which are usually optional, LMI is often made mandatory by most lenders if the borrower can’t pay a deposit of at least 20% of the property’s value. Depending on the loan and deposit size, LMI can cost thousands of dollars extra.


What does mortgage protection insurance cover?

Mortgage protection insurance features differ depending on the insurer or lender you go with, as well as the level of cover. You’ll typically get one of three payouts depending on the reason for not being able to make repayments, which include:

  • A lump-sum payment to cover the cost of the home loan due to your death. Any remaining funds can be used by your family for whatever purpose.

  • A monthly payment to cover your repayments due to you suffering serious illness or injury. These payments can range from anywhere to 30 days to three years.

  • A monthly payment to cover your repayments due to losing employment. These payments are usually for a shorter time, often no longer than three months.

It’s important to note if a medical professional has cited you as having an injury or illness in the 12 months prior to you buying insurance you’re extremely unlikely to be covered, as this will be seen as a pre-existing medical condition.


How much does mortgage protection insurance cost?

The cost of mortgage protection insurance comes down to a number of factors, including:

  • The insurer

  • The level of cover

  • The loan amount

  • Your age and gender

  • The number of people covered

  • Your smoking status

Generally, typical mortgage protection insurance policies cost around 0.5% to 1% of the loan amount annualised but the cost of each policy will be different. Insurers and lenders should be able to quote how much a policy would be with them, so make sure to get a range of quotes to ensure you’re getting the best deal.

Mortgage protection insurance generally has poor coverage

The Australian Securities and Investments Commission (ASIC) released a report in 2019 that found the majority of CCI products sold by banks and lenders (which includes credit cards and other loans besides mortgages) “consistently failed consumers” and is extremely poor value for money. Analysis of all CCI policies by ASIC revealed only 19 cents was paid out for every $1 paid in premiums, and most claims were either denied or withdrawn.

On that $529.50 policy, the typical customer would only get benefits worth just over $100 per year if they made a claim. This is pretty poor value for money. According to Gerard Brody, CEO of Consumer Action Law Centre, that’s less than half of what’s typically paid out on home insurance.

“These products truly are junk,” Mr Brody said in Consumer Action’s ‘Junk Merchants’ report.

“They’re poor value products that are commonly sold in a manipulative way and are getting worse. Many people don’t even realise that they’re purchasing the insurance because they’re focused on buying the main product.”


Who offers mortgage protection insurance?

There aren’t many lenders, banks or insurers who offer mortgage protection insurance, as many of them stopped selling the product after the banking royal commission. But according to Savings.com.au research, the following organisations (which aren’t always all lenders) do:

  • Aussie Home Loans

  • ANZ

  • Greater Bank

  • MetLife

It’s also important to note you may not be able to shop around depending on who you are getting your home loan from. For example, ANZ exclusively provides mortgage protection insurance to their customers and no one else.


Do you need mortgage protection insurance?

Mortgage protection insurance only covers you for your mortgage repayments should you suffer an event that affects your income. It won’t cover any other bills you’ll still have to pay like electricity bills, phone bills, car registration, and food expenses.

Mortgage protection insurance can also be expensive. If you had a 30-year mortgage and had a relatively cheap policy of $500 a year, you’d pay $15,000 in premiums over the course of the loan. If you’re looking for peace of mind and feel you can afford mortgage protection insurance, it may be right for you, but whether you need it comes down to your specific circumstances.


What other options are there?

If you want a safety net in the event something prevents you from making home loan repayments, but feel mortgage protection insurance isn’t for you, you may want to consider the following options:

Income protection

Income protection covers you in the event you lose your income due to illness or injury, like mortgage protection insurance. The key difference however is income protection pays a monthly benefit of anywhere between 75-85% of your income which you can use as you wish. This means you can use it to make mortgage repayments as well as any other bills you may have. You’ll be required to pay a monthly premium to be covered, and in the event of your death, the insurer will typically pay out your whole benefit to assist your family financially.

Life insurance

Also known as death cover, life insurance will pay out a lump sum to whoever you have nominated in your policy when you die. That party can do whatever they wish with the money, so it could go to covering mortgage repayments and any other debts you may have incurred over your lifetime.

Total and permanent disability (TPD) cover

In the event you suffer an injury or illness that prevents you from working permanently, TPD cover will pay out a lump sum. Sometimes included with life insurance, you could also use this payout to cover mortgage repayments among other bills if necessary.

Redraw facilities

Making extra repayments on your home loan can be a great way to get ahead, and a redraw facility allows you to withdraw these funds and use them how you wish, like in an emergency where you’ve lost income. While it’s unlikely the funds in your redraw facility will be as much as you would get from insurance, they may be enough to tie you over until your income returns or you sort something else out.

It’s important to note the funds in a redraw facility belong to the lender technically, so you could be prevented from withdrawing the amount you need. Additionally, your lender may charge you for adding a redraw facility through a higher interest rate, or may not offer one at all.


What to consider when looking for mortgage protection insurance

If you think mortgage protection insurance is for you, consider the following when looking for policies:

Cost

Consider whether you can afford the cost of the policies you’re considering, as well as whether the cost is suitable for what you get back in the event of a claim. If you’re going for a cheaper policy, ensure it still has the benefits you’re after. Keep in mind, the greater the cover you’re after and the more features it has, the more expensive your premium is likely to be.

Payout

The insurance payout is arguably as important as the premium you’re paying. If you’re looking for a wide range of cover, ensure there is sufficient cover for all adverse events and not just a decent payout for death. Statistically, the most likely event you’ll claim for is loss of employment, so try to find cover that pays out for a solid period of unemployment.

Make sure you’ve also built up an emergency savings fund in the bank.

Dependents

The age and condition of the people who depend on you should factor into the level of cover you get. If you have a young family who will need support for some time, you may want to consider getting a higher level of cover. If you don’t have children and are a bit older, a lower level of cover is probably more suitable.

The provider

Insurance is an oft-maligned industry; whether that’s deserved is up to the individual making the judgement, but nonetheless, doing your research on the provider is vital when shopping for policies. Check out reviews, analyse how your customer experience has been, and talk to friends and family to see whether they can recommend any policies.

Waiting period

If something stalls your income and you need to make a claim, chances are you’ll need the money ASAP. Check the fine print or ask your provider to see how long it will take to get your payout to arrive to avoid getting yourself into further financial strife.


Pros and cons of mortgage protection insurance

Mortgage protection insurance has its benefits and drawbacks:

Pros

  • Protect yourself from missing home loan repayments

  • Prevent you from losing your home

  • Flexible options regarding features and type of payout

Cons

  • Only covers your home loan repayments

  • Can be expensive if the provider considers you high risk

  • Other options may be better value for money

  • Only one payout if all parties on the policy die


Savings.com.au’s two cents

Mortgage protection insurance can prevent you from falling behind on your repayments, and can even stop a default on your home loan if something were to stop you from working. The biggest pitfall of mortgage protection insurance however is it only covers your mortgage repayments, and while these will often be a household's biggest monthly expense, there are many other bills to pay.

If you take out a mortgage protection insurance policy, consider building up an emergency fund to double protect yourself. Even if you’re not taking out a policy, try to build up an emergency fund anyway! You should also do your homework on some of the other insurance options available like life insurance and income protection insurance.


Photo by DocuSign on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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